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Thursday, October 2. 2014
Chart below via The Truth Behind Warren Buffett's $31,500 House
Can this be accurate? And how does inflation fit in?
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Adjusted for inflation.
A house is a bad investment if the alternative is stock. Not so bad if the alternative is rent. Depends on your situation and how long you plan to stay.
I'm considering buying a house, more because I basically "lock in" my rent for the next 20 years, and because it's a method of saving slightly less than I'm paying in.
You've probably thought about this but, be sure to include the state rent - or property tax. you're also going to have to cover repairs etc.
Stocks are a bad investment when their "value" is being run by institutions with unlimited "free" money. Unless, of course, you are one of those who knows in advance what those institutions are going to do when...
Not that those institutions are even REMOTELY so corrupt, nor that there are Right People who do indeed get such information from them...
Now days we have this thing called "No-Load Mutual Funds" run by people who's job it is to do this sort of thing. These "funds" as they're often called invest in a large numbers of stocks, thus avoiding what investors call "specific stock risk".
These investment vehicles generally have a theme like "small cap", "vice funds", "emerging market" or "S&P 500" (thousand etc.) when let you tailor your investments to your risk and growth or income goals.
Of course they assume you know which stocks to buy. Bre-X? $6 billion lost. Nortel? Enron? etc...
I am not disputing the higher returns from stocks but the article doesn't mention the risk inherent in stocks vs real-estate.
It would be interesting to see what professions gain the most when buying stocks. I have a hunch that the insiders make vastly more money than the regular guy who has stocks in their mutual funds.
Let's see ... stocks spin off dividends, stock splits, tend to keep their valuation with inflation. And you can reinvest those dividends.
Houses? Cost you taxes, utilities, repair and maintenance. You can deduct your mortgage interest, but no refundable credit. Housing prices don't tend to keep up with inflation unless you are in a fortunate part of the country. This really isn't surprising. A house can't through off any income to reinvest while you live in it- it just costs you.
The kicker? You got live somewhere, you don't have to own stocks.
I'm presuming Buffett was talking about his personal residence. Rental property can be really risky - more deductions, but the chances of bad tenants, rent control, etc.
Let's not knock houses that fast. First, ownership pays untaxed dividends in the form of housing services. Suppose you bought bonds and used the interest income to rent a house. You would then have to pay the rent out of post-tax income, and the rental payments would not be tax-deductible. Instead you buy the house and live in it rent-free. You also get to deduct mortgage interest and real estate taxes. Second, if you live in the right neighborhoods, your tax-deducible real estate taxes pay for your kids schooling and you get a school that rivals private schools in quality. If you rent, you get the schooling but you don't get to deduct the real estate taxes embedded in the rent. You are most screwed if you send your kids to religious school and rent and so pay real estate taxes and tuition. Third, with a house much of your capital gains are free of tax. With shares and bonds they are not. Fourth, with a house you have a put option on the mortgage lender; should the value of your house fall below the value of the mortgage you can live rent-free for a while and then walk away from it. That limits the size of your potential loss. To do that with stocks you have to buy put options. (To be fair, the put option in housing is built into the mortgage interest rate.) Fifth, if you live in areas with strong demand for housing and zoning laws that prevent the construction of multi-family housing your price appreciation may be quite impressive. (Think San Francisco; tough luck Texans.) Lastly, once you have paid for your house should you run into hard times, you can continue to live in your house while deferring maintenance, and perhaps even taxes for some time. There is a reason the majority of the US population lives in owner-occupied housing, and votes for laws that make it even more profitable.
Long ago, I ran a comparison of rentiing and investing versus owning. The value of renting and investing is excellent if you know what to invest in and average at least 7% a year on average, which isn't terribly hard to do.
On the other hand, after a period of time (and it's been a while so I can't remember the time frame, but I think it's 15 years), owning the home becomes the better investment for a number of reasons. For one, rent always goes up, and fixed rate mortgages don't. In fact, if rates fall, you can benefit from refinancing. Second, you get value from living in a home and improving it that you can't get from renting. Third, you build equity that you can't get with rent.
But capital appreciation of a home can't keep up with a business. Businesses have a cash flow that a home doesn't. It makes perfect sense that a market basket of stocks outperforms home ownership - but if you have to offset that with paying for rent, over the long haul you're going to be worse off than owning.
One issue people tend to forget is that they 'live up' to their income. If you could live in a small, cheap, rent-control apartment for the first 30 years of your life and be happy living there, you can invest and outperform your friends who own a home. But that's not how it works. Over the same 30 years, you're likely to spend more on a better apartment, go get that expensive car rather than invest, eat at nicer restaurants, etc.
I'll opt for owning over renting any day. I bought a condo when I was 29 because the mortgage was equivalent to my rent. When I got married and bought a house, I started renting out the apartment. It was the second best investment I ever made. It has appreciated AND it throws off rental income.
I should add this: I don't view my home as an investment, any more than I view my car as an investment.
It's certainly better than thinking of the car as an investment, but both have significant costs associated with them. Obviously a car is not an investment.
But a house (of some kind) is a necessity. Whether it's a rental property, a boat, or some other arrangement, you need a place to live, and whatever you choose to live in has costs associated with it. The choice you make about your living arrangements is based on what your appetite for a variety of requirements are - location, costs, whether you enjoy working on things, whether you have vision for a property or a locale, whether you can turn it into passive income at some point, all these things add up to making your ultimate decision.
I'd have to go back to verify the stock market numbers but the house appreciation number MUST be wrong. The 19% certainly cannot be a cumulative rate. The only place where existing homes may not have at least quadrupled since 1958 is maybe Detroit. In most major metro areas, prices of existing homes have risen maybe 5x to 10x.
One thing for sure, those house prices didn't come from LA. My aunt and uncle bought a house in LA for $8,000 in the early '50s. My aunt sold the house in '75 for $45,000. Last year I looked it up on the LA tax roll: close to a million dollars appraised value.
I don't get it. The stock market has risen but it's priced in dollars that get devalued each year. You call those real gains?
Well, there is one thing that has risen in value more than stocks since 1958: Gold.
Gold is up about 3500% since Buffett bought his house, which is saying something because almost all of that appreciation has happened since 1973.
There are multiple components of the stock market and it is hard to quantify with a single statement. But the major component is that it is investors and gamblers in a large "game" where no money is created. A million people invest in a stock and the stock goes up. 100 people cash out and each make a million dollars profit but 999,900 don't cash out and their net worth goes down by $101. The 100 winners write books or run for mayor of NY City and we think they are geniuses and the 999,900 who lost $101 are never heard from. Can you make a consistent 7% from stocks year after year for yur lifetime? Probably not. Probably you will make 40% in a very good year, lose 40% in a very bad year and make or lose various amounts between those extremes the rest of the time but you will brag aout the year you made 40% and convince yourself you average 7% overall. Having said all that there is of course the safer "bet" of investing in solid stocks, stocks that consistently pay out dividends and diverstiy that will/should pay off over time. But even that is a gamble.
Right now the stock market is in the largest bubble anyone living today has ever seen. It is like August 1929 and everyone is making money and bragging abut how smart they are. My advice is to get out if you can. And even for those who because of taxes or other restrictions think they cannot get out to do it anyway. I don't base this advice on insider knowledge, stock inveting acumen or anything other then common sense. Common sense tells me the market will regress to the mean and awareness of the underlying world and U.S. economic basics tells me that when it does it will plunge far below the mean and there will be little if anything left to even bring it back to a more realistic level. At the risk of over stating it I would describe the situation as the perfect storm. I would feel better if I had more faith in our elected and appointed leaders but I do not. When things start going South our leaders will say the wrong things and do the wrong things and when none of that works they will double down and insist that it's our fault. (Note that the CDC response to ebola is we can't/won't prevent people with ebola from coming here and to even suggest that is racist. That's where our leaders heads are.)